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A coalition of Canada’s largest retailers and commercial property owners is lobbying Ottawa for a rent relief package that could see major landlords slash rent by one-third for their distressed tenants and walk away from billions of dollars in revenue, while providing loans to retailers to cover the rest of their rent.

The group, which includes Hudson’s Bay Co., Indigo Books & Music Inc. and Cadillac Fairview, is proposing that landlords provide an abatement on one-third of the rent for 10 months to retail tenants whose revenues have declined significantly. The companies have also asked the government to establish a low-interest loan program to help retailers cover the other two-thirds of the rent, according to people with knowledge of the proposals. The Globe is not identifying the sources because they were not authorized to speak publicly on the matter.

The proposal is designed to help large retailers that aren’t covered by Ottawa’s rent relief program for small businesses. That program provides taxpayer funds for half of small tenants’ gross rent as long as the tenant has lost a minimum of 70 per cent of its revenues due to the novel coronavirus pandemic and pays $50,000 or less in monthly rent.

Indigo CEO Heather Reisman and Cadillac Fairview chief executive John Sullivan are leading the efforts on behalf of the coalition of big retailers and commercial real estate owners. The group includes Cineplex Inc., Aritzia Inc. and GoodLife Fitness Centres Inc.; as well as property owners such as RioCan REIT, SmartCentres REIT, Oxford Properties and Ivanhoé Cambridge Inc.

The coalition has been collectively advocating for the measures in order to show broad industry support. But the loans could apply to any retailers designated as non-essential by governments that have been forced to close. Many larger retailers are in need of rent relief, but don’t qualify for the small business relief program. The measures would not apply to retailers such as grocers, which have not suffered deep enough revenue declines during the pandemic.

As tenants face the challenge of paying rents, building owners, particularly those with hard-hit retail spaces, have had to consider options in order to cover their own costs. These include property taxes that have soared over the years in major cities. The owners with mortgages are in a particularly challenging spot.

“Those with tenants in financial crisis typically want to ensure the businesses were in good shape prior to the pandemic, that the businesses truly need help and that tenants have looked into claims for business interruption insurance, as well as government stimulus programs.”

“Property tax is probably the largest component of rent that the tenant has to pay and municipalities typically aren’t abating property taxes. So, the landlord is still faced with the property tax bill they have to pay and the mortgage obviously.”

“There’s the added complication that if an owner wants to defer or lower rents, they have to check with their lender, or it could be a breach of their mortgage agreement.”

The capitalization rate of a real estate investment is calculated by dividing the property’s net operating income by the current market value. It’s the most popular measure for how real estate investments are assessed for profitability and rate of return.

Our expectation is that they will start to go up, because people are going to start to see more risks. The days of looking at an asset and painting it with a broad brush . . . are evaporating.

However the greatest factor for cap rates universally is the strength of a landlord’s tenants to pay their rent.

How will the recession brought about by government measures to combat COVID-19 impact commercial real estate valuations?

While it’s still too early to know long-term repercussions, companies are currently carrying out stress tests, forecasts, analyses and covenant-checks of assets to try to avoid surprises later.

Theoretically, property values should be moving lower as risks have increased and cash flow has likely weakened. However, as long as companies and high-net-worth investors seek to deploy large amounts of capital to buy real estate, the trend of high property valuations could continue.

Retail valuations

The retail sector has been challenged in recent years

While trophy assets such as CF Toronto Eaton Centre and Yorkdale Shopping Centre should still be very strong, there will be a widening gap between good and bad malls.

Enclosed malls in secondary and tertiary markets that were already ripe for redevelopment opportunities may have those plans hastened.

Grocery and pharmacy-anchored retail strips have generally performed well, as those stores have remained open to provide essential goods. However, those locations often also feature small businesses such as salons, bakeries and dry cleaners that may be in for tough times.

Migration to online shopping isn’t likely to end.

Multifamily

“Multifamily real estate has historically been the most resilient asset class and we think that continues today,” said Anna Kennedy, chief operating officer of KingSett Capital, a private equity real estate firm with $13 billion of assets under management.

Kennedy cited low vacancy rates, upward pressure on rents and an existing need for more rental apartments in key Canadian urban markets, which she believes portend continued strong performance.

Sender said people who are renting typically don’t have a lot of alternatives, and need to live somewhere, so “it makes sense that multifamily will be more resilient than commercial asset classes.”

Office

The majority of office workers across Canada have been working from home for about two months, and Kennedy said it’s been “quite remarkable” how they’ve adapted.

However, the consensus of the panel members was people still long for human interaction, working in teams and innovating, as well as creating new business relationships instead of just maintaining existing ones. All of this can best be done in office environments.

“If anything, they may well need more space because they’re concerned about the higher densities in their office space,” said Kennedy.

Increased workplace flexibility through hoteling systems and having more people work from home, at least part-time, could reduce demand for office space. However, Johnston believes it will be balanced by the desire for increased buffering and distancing.

Calgary office

While the office markets in most major Canadian cities have performed well of late, Calgary was a glaring exception. The most recent collapse of oil and gas prices has exacerbated the problems there.

Johnston said Altus was seeing light at the end of the tunnel with absorption and had forecast rental growth for the next few years, but that will now be amended.

Long-term leases signed years ago now have rents well above market value, and rents have decreased dramatically upon lease rollovers, according to Johnston. With Calgary’s downtown office vacancy rate hitting 24.6 per cent in Q1 2020, and expected to rise, rents should continue to decline.

One note of optimism was expressed by Kennedy. KingSett has four per cent of its income fund invested in Calgary and owns a couple of office buildings there that have “already been written down substantially over the last four years.”

She said rent collection for April was more than 90 per cent.

Seniors housing

Johnston said Altus was doing a lot of feasibility work for companies interested in building more seniors housing, which had been acknowledged as a growth sector because of Canada’s aging population.

The large COVID-19 death tolls in seniors homes has likely put a pause on that. Down the road, however, there will continue to be a need for such facilities — albeit with increased staffing, cleaning, security and other improvements.

“It’s not all seniors housing that’s being hit hard,” said Chin. “It’s long-term care which is the most vulnerable.”

Johnston said the children of seniors often decide if their parents will go into these facilities. Their personal wealth has potentially been decreased in this pandemic-caused recession and they may no longer be able to afford to pay for it.

Industrial

Johnston believes the industrial sector should remain relatively unscathed and companies will want to build more if they can find the land. Industrial space close to cities will continue to be especially important for last-mile delivery of goods.

Small-bay properties may be challenged, depending on where they fit in the supply chain, according to Johnston.

Chin said supply chain issues might prompt some companies to stockpile certain goods to ensure availability, and places will be needed to store them.

“We’ve lost some of our confidence in relying on global supply chains,” said Kennedy. “I think we may bite the bullet and pay more for certain strategic goods that we may want to manufacture at home.”

Hotels

Hotels will get “kicked in the teeth the hardest,” according to Sender, who believes the asset class is “in for a tough go for a period of time.”

Johnston said tourist-oriented hotels will suffer because people may be wary of going to them, travel may continue to be restricted to some extent, and disposable income could be impacted over the next few years.

Downtown hotels in major cities catering to diverse clientele – business clients as well as vacationers – may recover more quickly.

Development

Some new development has been temporarily put on hold due to COVID-19-mandated construction stoppages or slowdowns, which is likely to impact project budgets. Chin said the primary issue with development is delayed registrations because of municipal offices being closed.

Johnston said Altus is still performing development appraisals, however, and it’s too early to say if land values have been negatively impacted.

Although Otera is being conservative with its loan structures, Chin said the company is “looking at new development on a very selective basis. It depends on who the sponsors are.”

Otera has been repaid on three large condominium loans through the COVID-19 crisis and Chin expects to be repaid on two more in the next month, which are positive signs.

I have followed CIBC World Markets Managing Director and Deputy Chief Economist Benjamin Tal for nearly 20 years. He has a solid track record. He’s what he’s saying about what to expect going forward in 2020 and beyond.

On the Economy:

Multifamily, office and industrial real estate will emerge from the COVID-19 crisis as winners, while losers will include the energy, transportation and hospitality sectors.

“It’s not a recession, it’s not a depression, it’s something in-between. It’s basically a frozen economy.”

Tal anticipates governments continuing to play a large role in the economy, as relief payments to get people through the crisis evolve into a more permanent universal basic income system.

Many companies will start thinking less in terms of profits and more in terms of resiliency.

More medical-related products and other essential goods will be produced domestically and there will be a move from “just-in-time” to “just-in-case” inventory systems.

On Real Estate:

Tal said real estate valuations being made now have very little value and people should be careful about making decisions based on the current economic situation. “I think the damage to the real estate market isn’t as significant as perceived.” Tal expects the Canadian economy to emerge from the recovery phase in 2022 or 2023 and that “the demand for real estate will remain very strong.”

The Canadian rental housing market is not in danger of collapse. Tal said the rent payment rate among those low-income earners was higher than for Canadian renters in higher income brackets. He attributes this to many low-earners now receiving a $500 weekly Canada Emergency Response Benefit payment from the federal government, which they’re using to pay rent.

The number of immigrants and non-permanent residents in Canada will decrease this year. A large percentage of those people are also renters, which will decrease demand for rental housing. Tal expects that to be balanced out somewhat by a reduction in supply due to a lack of apartment building completions, so the vacancy rate increase won’t be dramatic.

Commercial real estate sectors:

“But at the same time, I think that those who predicted that this market will collapse are overstating the damage. I don’t think that the move towards people working from home will be as dramatic as perceived, given the productivity aspect.”

“High-quality retail will remain in demand, and in fact it will improve,” said Tal. “I see significant damage to low-quality retail. This means that you will see e-commerce taking over.”

On November 27, 2019, the Government of Alberta released revised Regulations and Amendments to the Alberta Condominium Property Act that will come into force January 1, 2020.

The revisions to the prior draft regulation includes adding to the list of qualified reserve fund study providers; adjusting the fee scale for the provision of documents; clarifying recoverability of an insurance deductible; simplifying the standard insurable unit description; increases to sanctions and rental deposits; reducing the administrative burden surrounding the AGM.

These adjustments are the result of the Government’s five-month review to ensure that Regulations do not cause unnecessary administrative burden or challenge for condo boards, owners and corporations.

Fort McMurray has topped a ranking of the world’s most affordable housing markets.

The Alberta city leads affordability in the 2020 Demographia International Housing Affordability Survey which rates middle-income housing affordability using the “Median Multiple,” which is the median house price divided by the median household income; a score of 2 would mean it takes twice the median income to afford a median-priced home.

Fort McMurray with a median multiple of 1.8 ranks highly following economic disruption in recent years as oil prices and investment have tumbled.

Actions taken since the 2008 financial crisis to address the federal government’s concerns about Canada’s housing market.

July, 2008:
• After briefly allowing the CMHC to insure high-ratio mortgages with a 40-year amortization period, then Conservative finance minister Jim Flaherty moved to tighten those rules by reducing the maximum length of an insured high-ratio mortgage to 35 years.

February, 2010
• Responding to concern that some Canadians were borrowing too much against the rising value of their homes, the government lowered the maximum amount Canadians could borrow in refinancing their mortgages to 90% of a home’s value, down from 95%.
• The move also set a new 20% down payment requirement for government-backed mortgage insurance on properties purchased for speculation by an owner who does not live in the property.

January, 2011:
• The Conservative government tightened the rules further, dropping the maximum amortization period for a high-ratio insured mortgage from 35 years to 30 years.
• The maximum amount Canadians could borrow via refinancing was further lowered to 85% of a home’s value.

June, 2012
• A third round of tightening brought the maximum amortization period down to 25 years for high-ratio insured mortgages.
• A new stress test was also introduced to ensure that debt costs are no more than 44 per cent of income for lenders seeking a high-ratio mortgage.
• Refinancing rules were also tightened for a third time, setting a new maximum loan of 80 per cent of a property’s value.
• Another new measure limited the availability of government-backed insured high-ratio mortgages to homes valued at less than $1-million.
• Limit the maximum gross debt service (GDS) ratio to 39% and the maximum total debt service (TDS) ratio to 44%.

December, 2015
• The recently elected Liberal government moved to tighten lending rules for homes worth more than $500,000, saying it was focused on “pockets of risk” in the housing sector.
• The package of measures included doubling the minimum down payment for insured high-ratio mortgages to 10% from 5% for the portion of a home’s value from $500,000 to $1-million.

October, 2016
• Borrowers who take out insured mortgages that are fixed-rate loans of five years or longer will be subjected to a “stress test,” by qualifying at the Bank of Canada’s Benchmark rate (then about 2% higher than a typical 5-year fixed rate). This same stress test is already in place for all mortgage terms of less than 5 years and for those taking a Variable Rate.
• Ottawa unveiled new measures aimed at portfolio insurance, a type of bulk insurance that banks use for mortgages with down payments of 20 per cent or more. Starting Nov. 30, the federal government will now require portfolio-insured mortgages to qualify under the same criteria used for the insurance taken out on homeowners with small down payments. Portfolio-insured mortgages will now be limited to a maximum amortization period of 25 years and a maximum purchase price of less than $1-million. It requires all portfolio-insured mortgages to be owner-occupied, prohibiting insurance on rental homes and investment properties. This change handed the banks a huge advantage over the Monoline mortgage lenders, and increased their market share and ultimately allowed the banks to increase mortgage interest rates.

January, 2018
• Home buyers with a down payment of 20% or more will be subject to stricter qualifying criteria (also known as a “stress test”) that would determine whether a homebuyer would be able to afford their principal and interest payments should interest rates increase. REFINANCING an existing property (20%+ Equity) will also be subject to the stress test. For qualification, the stress test will use either the 5-year benchmark rate published by the Bank of Canada or the customer’s actual mortgage interest rate plus 2.0%, whichever is the higher. Estimated reduction in borrowing for the average borrower, 15-20%
• OSFI directs lenders (excluding credit unions and private lenders) to have internal risk management protocols in higher priced markets (sometimes called “hot real estate markets” like Toronto and Vancouver). This is a continuation of a policy already in place. Many mortgage lenders have been following the principles of the policy for the last 10 to 12 months.
• Mortgage lenders (excluding credit unions and private lenders) are prohibited from arranging with another lender: a mortgage, or a combination of a mortgage and other lending products, in any form that circumvents the institution’s maximum LTV ratio or other limits in its residential mortgage underwriting policy, or any requirements established by law. This is often referred to as “bundling” or “bundle partnership”.

Do you want to know what the true year-over-year price changes are city by city in Canada? The Teranet National Bank National Composite House Price Index is not distorted by our ever-larger and more luxurious houses and condos. Teranet tracks same-house sales by market across Canada that is easy to drill down into the data to see what is the true value change for same-property sales… http://www.housepriceindex.ca/

Housing affordability in Alberta’s cities is better than it has been since the 1980’s in most areas. In measuring housing affordability there are 3 major components: Incomes, Housing Prices, and Mortgage Interest Rates. So let’s briefly look at those 3 key factors. Alberta incomes, though down, are still leading the nation. Housing Prices are down marginally, and mortgage interest rates are as low as they have ever been. And that make this an excellent time for buyers.

The Canadian Centre for Economic Analysis (CCEA) published a report on Shelter Affordability Across Canada’s Provinces which measures the proportion of income that households devote to their shelter-related needs (including transportation, utilities, and maintenance).

A sub-set of that report, CCEA’s bulletin of April 29, 2016 shows that Alberta and Newfoundland are the only provinces in Canada that feature a Shelter Consumption Affordability Ratio (SCAR ratio) of 35% or less, implying that shelter affordability is relatively less of a problem on average in these provinces than in the rest of Canada.

On the same subject, RBC Economics Research publishes a quarterly report looking at home ownership affordability in Canada entitled Housing Trends and Affordability. The report attempts to balance out differences in incomes and in housing process by province and by city in order to show the ‘relative’ affordability from region to region.

Unfortunately the report does not also take into account different taxation levels, which would make the report much more accurate. Having said that, it is an excellent review of housing costs around the country, and shows us that sometimes the lowest price is not actually the lowest cost for families when the regional variance in incomes is accounted for.

In descending order, here are Q1 2016 ratios for the 6 major cities, showing the percentage of average pre-tax income required for housing costs (mortgage payments, utilities and property taxes):

Vancouver 87.6% aggregate. Single family homes 119.5%.

Toronto 60.6% aggregate. Single family homes 71.7%.

Montreal 42.9% aggregate. Single family homes 42.4% (as SF homes in Montreal are less expensive than multi-family).